Perfect Competition Overview

In a perfectly competitive market, the price of a good or service is determined by the interaction of industry-wide supply and demand forces. This means that individual firms have no control over the price and must accept the market-determined price.

A perfectly competitive firm faces a horizontal demand curve at the market price. This means that the firm can sell any quantity of output at the prevailing market price without affecting the price.

Total revenue (TR) for a perfectly competitive firm is simply the product of the price (P) and the quantity (Q) sold. This reflects the fact that the firm can sell any amount at the prevailing market price.

In perfect competition, marginal revenue (MR) is equal to the price (P). This is because the firm can sell an additional unit of output without changing the price.

Economic profit is the difference between total revenue (TR) and total costs, which include both explicit costs (out-of-pocket expenses) and implicit costs (opportunity costs). It represents the true return on a firm's resources.

A market structure with many firms selling identical products, with free entry and exit, and no significant barriers to entry. Each firm is a price taker, meaning it cannot influence the market price.

The point where the firm's marginal cost equals the market price, resulting in zero economic profit in the long run.

A market structure where there's only one seller of a unique product or service, with significant barriers to entry.

The demand curve faced by a monopolist, which is downward sloping, reflecting the ability to charge higher prices for less output.

The additional revenue a monopolist earns from selling one more unit of output. It's always less than the price of the unit.

The point where a monopolist's marginal revenue equals its marginal cost, maximizing its profits by balancing additional revenue and additional costs.

Factors that prevent new firms from entering a market and competing with existing firms.

The loss of economic efficiency caused by a monopoly's underproduction, reducing total surplus (consumer surplus + producer surplus) in the market.

The practice of charging different prices to different buyers based on their willingness to pay.

A situation where economies of scale are so significant that a single firm can produce the entire market output at a lower cost than multiple firms.